Online university Grand Canyon Education ( LOPE) went public recently, the first U.S. company to win that honor since Rackspace's ( RAX) IPO. Remember that? It was way back on Aug. 8, making for longest IPO drought since the mid-1970s.

Rackspace is trading at $6 and change -- half its $12.50 offering price -- and it traded as low as $4.47 in October.

Grand Canyon has done better, much better. After cutting its price from a range of $18-$20 to a range of $12-$14, Grand Canyon debuted last month at $12 a share. After rallying 10.1% Wednesday, the stock posted its highest closing price in its short history.

Grand Canyon was hailed as evidence that the IPO market was still working -- if investors could only be enticed by strong fundamentals. Most of the coverage was favorable to the company, if skeptical that the IPO market would come roaring back any time soon.

Sure, Grand Canyon Education has the promise of strong growth, even perhaps in lean times. But its prospectus is very much a mixed bag of enticing financials and red flags. Among the latter: a federal investigation, a whistleblower lawsuit charging fraud and restatements of three years' worth of accounting.

Baptists founded Grand Canyon University in 1949, and it remained a liberal arts nonprofit school until 2004, when a group of outside investors bought all of its non-real estate assets for $500,000 and assumed its liabilities. Three months later, they came back and bought the real estate for $27 million.

The idea was to turn the school, with 3,000 students enrolled, into an online adult-education school akin to University of Phoenix. Grand Canyon's president, who resigned just before the sale, told the Baptist Press he "was simply trying to follow the will of God."

In many respects, things have turned out well. Grand Canyon's enrollment has since grown to 22,000 as of Sept. 30, reflecting a 63% increase over the previous year. By comparison, the University of Phoenix's enrollment is 362,000. GCU's degrees center on education, business and health care -- areas that appeal to working adults seeking new degrees.

Online education seems to be one of the rare corners of the market where investors are still feeling cautiously bullish. University of Phoenix's parent, Apollo Group ( APOL), has seen its stock rise 77% since hitting a low point in late March.

Grand Canyon's financials show similar strength. The company's revenue grew 60% to $109.6 million in nine months through Sept. 30. Operating income rose fourfold to $9 million, and net income rose eightfold to $4.5 million. By contrast, Apollo's revenue in its last fiscal year rose 15% and its net income 17%.

Grand Canyon is still in growth mode, and its margins are expanding, as well. Operating profit in the first nine months of the year were 8.2%, compared with 3.2% in the year ago period. And cash flow from operations rose to $18.1 million in the period from $12.2 million a year earlier.

The company has enough cash to finance much of its planned growth. So why is it dipping its bucket in the least hospitable public markets in decades?

This company doesn't need the money from an IPO. It could have waited a year or so and possibly received a better valuation. Instead, it slashed its offering price to raise the money as if in desperation. Then it handed three-quarters of the $111 million in proceeds over to insiders.

The four directors who approved that handsome distribution happened to be insiders. Two of them represent Endeavor Capital, a Portland, Ore.,-based venture capital firm that owned 30.1% of Grand Canyon before the IPO. The other two are brothers: Chairman Brent Richardson and General Counsel Christopher Richardson. Together, they owned 21%. Since the IPO, the company has added two independent directors.

The company's SEC filings contain other warning signs, including this sentence: "We are currently in the process of remediating ... material weaknesses, but have not yet been able to complete our remediation efforts." One such weakness is the allowance for doubtful accounts in 2008, which had to be increased. Another is the improper recording of assets contributed by an entity owned in part by the Richardson brothers.

There's more, including a long and costly legal dispute with the school's former owners, but the most unsettling disclosure is that the Education Department's Office of Inspector General has subpoenaed Grand Canyon Education for salary and performance records of its enrollment staff. The company believes it's under investigation over whether it compensated staff "based on success in securing enrollments or financial aid."

The investigation stemmed from a whistleblower lawsuit claiming the school not only improperly compensated its enrollment counselors but also submitted false records since 2001 to have fraudulent claims paid. The prospectus notes, however, that the government declined to take over primary control of the whistleblower's lawsuit.

Going strictly by the financial numbers, Grand Canyon measures up pretty well. But the company rushed into an IPO, at a huge discount, even as accounting issues and significant legal uncertainties remain unresolved.

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